Markets are signaling that an economy that plunged into its deepest recession in decades just a year ago is ready to roar.
Major U.S. stock indexes have set 32 record highs in 2021, including Wednesday’s 424-point surge by the Dow industrials to 31962. Long-term bond yields are rising, showing increasing demand for funds from consumers and businesses, and inflation expectations are at multiyear highs. The price of everything in markets, from a barrel of oil to a share of mall retailer GameStop Corp. to a bitcoin, seems to be going up.
And moments of caution have been short-lived. Earlier this week, investors sold tech stocks, concerned that the rising long-term interest rates brought by an improving economy would make tech less attractive—in effect, that the economic outlook was too good. But Fed Chairman Jerome Powell on Tuesday reiterated that low rates would be around for a long time. Tech stocks promptly bounced.
The everything rally shows that investors believe the fun is just getting started. They believe that a combination of more fiscal stimulus, more-extensive Covid-19 vaccinations and pent-up demand for consumption, on a background of near record-low interest rates, will at last kick-start economic growth and inflation that have been elusive in recent years.
As the U.S. moves past the pandemic, markets are saying Americans will spend on big-ticket items such as vacations and weddings, companies will go on hiring sprees and the transition to new technologies such as electric vehicles will accelerate. The most optimistic investors believe the economy, just months after it was devastated by the pandemic, will bounce back in a manner akin to the Roaring ’20s.
Why is the market so vehemently optimistic right now? For one, the Federal Reserve has repeatedly signaled it won’t raise interest rates soon, most recently in Fed Chairman Jerome Powell’s testimony before Congress on Tuesday. That promise alone is a powerful elixir for investor risk appetite, as the market action of the past two days shows.Fed Chairman Jerome Powell has signaled the central bank won’t raise interest rates soon.
Wednesday’s action also highlights some of the investor behavior that has changed over the past year. Pandemic shutdowns led to massive business destruction and a sharp rise in joblessness, prompting government and central bank stimulus that flowed quickly into markets. Many workers kept their jobs and lost their commute, and used the extra time and savings to start putting money in the markets, just as Wall Street brokerages dropped their online stock commissions in a gamble for market share.
The result has stood the past decade’s obsession with slow and steady index funds on its head. Some of the riskiest stocks have become investor favorites, fueled by investors congregating on social media platforms such as Reddit’s WallStreetBets forum and Twitter. Bitcoin has risen 10-fold off last year’s lows, thanks in no small part to the devotion of day traders and the occasional exhortation from social media grandees such as Tesla Chief Executive Elon Musk. Hertz Global Holdings Inc. became an investor plaything last year even after a bankruptcy filing meant that shareholder recoveries would be limited. GameStop shares doubled Wednesday, interrupting their sharp decline from last month’s highs and perhaps restarting one of the most epic stock frenzies in recent memory, in which an also-ran mall retailer briefly became the hottest stock of all thanks to the Reddit crowd.